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Malibu Boats: An IPO Play For Value Investors

|Includes:Malibu Boats, Inc. (MBUU)

Disclosure: I am long MBUU

On February 5, 2014, the IPO of Malibu Boats, Inc. (ticker: MBUU) closed and the Company's shares began trading on NASDAQ. Although as a value investor, I generally try to steer clear of IPOs (for some of the reasons described here), Malibu appears to be a compelling investment opportunity. Malibu has increased sales, net margins and their FCF/sales ratio over each of the past three fiscal years (as described below). Additionally, the shares are currently trading with a P/E of 7.89 and an FCF yield of 12.8%. Finally, since 2010, Malibu has had the #1 market share in the US with respect to performance sports boats. Their bargaining power, brand recognition and patents appear to provide it with a substantial economic moat.

Company background

Per their prospectus filed on February 5, 2014, Malibu Boats, Inc. (Ticker: MBUU) is a leading designer, manufacturer and marketer of performance sport boats, having the #1 market share position in the United States since 2010. Their boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating.

Note that unless otherwise noted - all data is taken from the prospectus.

Per the table below, Malibu has steadily increased its market share in the US over each of the past few years:

   

U.S. Market Share in Performance Sport Boat

Category

   
             

Manufacturer/Brand(s)

2008

2009

2010

2011

2012

2013 (as of 9/30)

Malibu Boats/Malibu and Axis

23.20%

23.50%

24.30%

28.80%

30.60%

 

32.90%

MasterCraft Boat Company,

             

LLC/MasterCraft

23.80%

24.60%

23.40%

24.20%

21.70%

 

19.70%

Correct Craft, Inc./Nautique

15.20%

13.90%

15.90%

14.80%

14.50%

 

15.50%

Skier's Choice, Inc./Supra and

             

Moomba

16.50%

15.60%

16.60%

15.60%

14.70%

 

12.90%

All others

21.30%

22.40%

19.80%

16.60%

18.50%

 

19.00%

               

Total

100.00%

100.00%

100.00%

100.00%

100.00%

 

100.00%

Click to enlarge

Malibu further indicates that sales of powerboats have not recovered since the financial crisis in 2008, and that sales are still far below the volumes reached immediately prior to the economic downturn, per the chart below. Of course, there is risk that demand may continue to remain low; that said, once many of the customers will have to replace their boats, assuming economic conditions remain favorable there should be a substantial uptick in sales to historic rates.

(click to enlarge)Click to enlarge

Malibu appears to have a substantial moat, based on the following factors described in their prospectus:

Strong Dealer Network. Malibu has developed what they believe is the strongest distribution network in the performance sport boat category, which allows them to distribute our products more broadly and effectively than our competitors. For fiscal year 2013,Malibu's dealers held the #1 market share position for the performance sport boat category in 75 of 133 U.S. markets. Additionally, Malibu has nominal dealer concentration, with their largest dealer responsible for less than 6.0% of their unit volume and their top ten dealers representing 36.1% of their unit volume in fiscal year 2013.

Highly Recognized Brands. The Company believes their Malibu and Axis brands are widely recognized in the powerboat industry, which helps them reach a growing number of target consumers. Malibu further believes that the appeal of their high performance and innovative products with athletes and enthusiasts contributes to their brand awareness with dealers and with consumers.

Patents: Malibu has patented various technologies used in their products. They introduced the patented Surf Gate technology in 2012, which allows users to surf on either side of the boat's wake, generates a better quality surf wave and was the Watersports Industry Association's Innovation of the Year in 2013.

Quantitative factors:

As mentioned above, Malibu has seen significant growth over the past few years, as set forth below:

    FYE June 30,  
  2011 2012 2013
Net sales $99,984 $ 140,892 $167,012
Net income $ (543) $ 11,106 $ 17,984
Free cash flow $ 5,307 $ 12,844 $ 23,021
FCF/Sales 5.31% 9.12% 13.78%
Click to enlarge

Balance sheet: When I first looked into Malibu, the most significant red flag was the balance sheet. Looking at the financials in Morningstar, they had a per share book value of -$3.20. However, per Malibu's prospectus, in connection with the IPO, the Company used a portion of their IPO proceeds to pay off all amounts owed under their credit facilities and term loans. This results in a total book value of approximately $36.1 million, and with a market cap of $177 million, this results in a P/B ratio of approximately 4.9.

Income Statement/Cash Flow: As noted in the table above, the Malibu has seen significant growth in net sales and net income in the past three fiscal years. Additionally, the FCF/Sales percentage has risen significantly, perhaps reflecting Malibu's increase in market share, and the competitive advantages that come along with that.

Summary

Overall, trading at less than 8x earnings, having grown significantly over the past few years, having no long-term debt and continuing to establish a substantial moat, Malibu appears to be a compelling investment opportunity.

Disclosure: I am long MBUU.

Stocks: MBUU